© 2019 Cengage Learning. All Rights Reserved

Property Transactions: Determination of Gain or Loss and Basis Considerations
© 2019 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

The Big Picture (slide 1 of 3)
Alice owns a house that she received from her mother, Paula, 7 months ago Paula’s cost for the house was $275,000 Alice is considering selling the house to her favorite nephew, Dan, for $275,000 Alice anticipates she will have no gain or loss on the transaction 2 © 2019 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

She comes to you for advice. As Alice’s tax adviser, you need answers to the following questions: You are aware that Alice’s mother died around the time Alice indicates she received the house from her mother Did Alice receive the house by gift prior to her mother’s death? If so, what was the mother’s adjusted basis? Did Alice instead inherit the house from her mother? If so, what was the fair market value of the house on the date of her mother’s death? Has the house been Alice’s principal residence during the period she has owned it? Was it her principal residence before she received it from her mother? How long did Alice’s mother own the house? What is the fair market value of the house? Does Alice intend for the transaction with Dan to be a sale or part sale and part gift? What does Alice intend to do with the sale proceeds? 3 © 2019 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Alice would also like to know the tax consequences of selling her boat She paid $22,000 for the boat 4 months ago and has used it exclusively for personal use She has been disappointed with its layout and capacity and would like to sell it She anticipates that she can sell it for $20,000 to $23,000 In addition, earlier this year Alice sold some stock at a realized loss and subsequently, a few days later, repurchased some shares of the same stock She has also asked you about the tax consequences of these transactions Once you have more information, you can advise Alice on the tax consequences of these various transactions Read the chapter and formulate your response 4 © 2019 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Determination of Gain or Loss (slide 1 of 7)
Realized gain or loss Difference between amount realized from sale or other disposition of the asset and its adjusted basis Sale or other disposition Includes trade-ins, casualties, condemnations, thefts, bond retirements 5 © 2019 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Amount realized from disposition Total consideration received, including cash, FMV of property received, mortgages/loans transferred to buyer Fair market value (FMV): Value of asset determined by arms-length transaction (i.e., amount set by transaction between willing buyer and seller with neither obligated to enter into transaction) Reduced by any selling expenses © 2019 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Adjusted basis Original cost (or other adjusted basis) plus capital additions less capital recoveries © 2019 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Capital additions Cost of improvements and betterments to the property that are capital in nature and not currently deductible © 2019 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Capital recoveries Amount of basis recovered through: Depreciation or cost recovery allowances Casualty and theft losses (and insurance proceeds) Certain corporate distributions Amortizable bond premium Easements © 2019 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Recognized gain or loss Amount of realized gain (loss) that is included in (deducted from) gross income © 2019 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Realized gains and losses are not always recognized Realized gains may be deferred or excluded Realized losses may be deferred or disallowed Realized losses from the sale, exchange, or condemnation of personal use assets (e.g., a personal residence) are not recognized for tax purposes Exception - casualty or theft losses from personal use assets In contrast, any gain realized from the sale or other disposition of personal use assets is, generally, fully taxable © 2019 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

The Big Picture - Example 12 Gain On Sale of Personal Use Assets
Return to the facts of The Big Picture on p. 14-1 Assume Alice sells the boat, which she has held exclusively for personal use, for $23,000 Recall that her adjusted basis of the boat is $22,000 Alice has a realized and recognized gain of $1,000 12 © 2019 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Basis Considerations (slide 1 of 5)
Original basis of an asset is generally its cost Bargain purchase assets have a basis equal to their FMV Bargain amount may be income to purchaser (e.g., employee = compensation; shareholder = dividend) © 2019 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Identification problems Security sales where specific identification not possible, use FIFO to compute basis © 2019 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Allocation problems: lump-sum purchase Must allocate basis to each asset obtained Allocation usually based on relative FMV of assets © 2019 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Allocation problems: Going concern purchase Assign purchase price to assets (excluding goodwill) to extent of their total FMV Then allocate among assets based on FMV Residual amount is goodwill Goodwill is an amortizable § 197 asset Allocation applies to both purchaser and seller © 2019 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Allocation problems: Nontaxable stock dividends Basis of original shares is allocated over the original and new shares Based on number of shares (common on common), or Based on relative FMV (preferred on common) Holding period includes the holding period of the original shares © 2019 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Gift Basis (slide 1 of 8) Gift property may have a dual basis, i.e., basis for gain and loss may differ Basis is dependent on relationship between FMV at date of gift and donor’s adjusted basis © 2019 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Gift Basis (slide 2 of 8) Gift basis for subsequent gain
When a gifted asset is disposed of by the donee, the basis for calculating any gain is the donor’s adjusted basis (carryover basis) This basis is called the “gain basis” Gain basis may be increased if donor incurred gift tax on gift Holding period for donee includes that of donor © 2019 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Gift Basis (slide 3 of 8) Gift basis for subsequent loss
When a gifted asset is disposed of by a donee, the basis for calculating any loss is the lesser of FMV at the date of gift or the donor’s adjusted basis This basis is called the “loss basis” If dual basis and sold for loss, holding period for donee starts on date of gift © 2019 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Gift Basis (slide 4 of 8) Gift basis when no gain or loss
If a dual basis exists and the amount realized from the disposition of a gifted asset falls between the gain basis and the loss basis No gain or loss is realized Holding period for donee is not needed since there is no gain or loss © 2019 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Gift Basis (slide 5 of 8) Example of gift basis determination
Alex received a gift from Beth on June 15 this year FMV of asset on June 15 was $8,000 Beth bought the asset on May 5, 1985 for $10,000 © 2019 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Gift Basis (slide 6 of 8) Example of gift basis determination (cont’d)
If Alex sells the asset for $11,000, there is a $1,000 gain ($11,000 – $10,000) If Alex sells the asset for $7,000, there is a $1,000 loss ($7,000 – $8,000) If Alex sells the asset for $9,000, there is no gain or loss ($9,000 – $9,000) © 2019 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Gift Basis (slide 7 of 8) Adjustment for gift taxes
The proportion of gift tax paid (on gifts after 1976) by the donor on appreciation of asset can be added to basis of donee. Because of the size of the unified estate and gift tax exemption ($5.60 million in 2018), basis adjustments for gift taxes are rare. If, however, gift taxes are paid, the donee's basis is equal to: Donor’s basis + [(Unrealized appreciation/Taxable gift) × Gift tax] © 2019 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Gift Basis (slide 8 of 8) Example of gift tax basis adjustment:
Cathy received a gift from Darren on June 15 of this year FMV on June 15 was $34,000 Darren had a basis in the asset of $29,000 Darren paid gift tax of $800 Cathy’s basis in the gifted property is $29,200 [$29,000 + ($5,000/($34,000 – $14,000) × $800)] © 2019 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Property Acquired from a Decedent (slide 1 of 7)
Generally, beneficiary’s basis in inherited assets will be the FMV of the asset at decedent’s date of death Exception: If the executor/administrator of estate elects alternate valuation date, basis is FMV on such date Inherited property is always treated as long-term property © 2019 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Inherited property valuation date Date assets valued for estate tax is either: Date of decedent’s death, which is called the primary valuation date (PVD) 6 months after date of decedent’s death, which is called the alternate valuation date (AVD) Can only be elected if both the value of gross estate and the estate tax liability are lower than if PVD was used © 2019 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Inherited property valuation date When PVD is used, beneficiary’s basis will be the FMV at date of decedent’s death When AVD is used, beneficiary’s basis will be the FMV at the earliest of: Date asset is distributed from estate 6 months after date of decedent’s death © 2019 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Example of inherited property valuation: At Rex’s date of death, April 30 of this year, his assets had an adjusted basis of $200,000, and a FMV of $700,000 PVD selected and assets distributed June 30; beneficiary’s basis is $700,000 © 2019 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Example of inherited property valuation (cont’d) October 30 this year (six months after date of Rex’s death), the assets had a FMV of $650,000 AVD selected and assets distributed November 10; beneficiary’s basis is $650,000 AVD selected and assets distributed June 30 when FMV of assets is $670,000; beneficiary’s basis is $670,000 © 2019 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Deathbed gifts Property inherited by taxpayer (or spouse) which was both appreciated and gifted by same taxpayer to decedent within 1 year of decedent's death Beneficiary’s basis in property is carryover of decedent’s basis (not date of death FMV) Generally the same basis taxpayer had on date of gift © 2019 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Survivor’s share of community property Both decedent’s share and surviving spouse’s share of community property receives basis of FMV on date of death Surviving spouse’s share deemed to be acquired from decedent Survivor’s share in common law state Only ½ of jointly held property of spouses is included in the estate In such a case, no adjustment of the basis is permitted for the excluded property interest (the surviving spouse’s share) © 2019 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

The Big Picture - Example 24 Property Acquired From A Decedent
Return to the facts of The Big Picture on p. 14-1 In 2017, Alice inherited her mother’s house At the date of death, the mother’s adjusted basis for the house was $275,000 The house’s fair market value at the date of death was $475,000 The alternate valuation date was not elected Alice’s basis for income tax purposes is $475,000 This is commonly referred to as a stepped-up basis 33 © 2019 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Disallowed Losses (slide 1 of 5)
Related parties (§ 267) Losses on sale of assets between related parties are disallowed For income-producing or business property, any loss disallowed can be used to reduce gain recognition on subsequent disposition of asset to unrelated party Only available to original transferee Not available for sales of personal use assets © 2019 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Related parties include: Family members Corporation and a shareholder who owns greater than 50% (directly or indirectly) of the corporation Partnership and a partner who owns greater than 50% (directly or indirectly) of the partnership © 2019 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Wash sales Losses from wash sales are disallowed Wash sale occurs when taxpayer disposes of stock or securities at loss and acquires substantially identical stock or securities within 30 days before or after the date of the loss sale © 2019 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Wash sales Disallowed loss is added to the basis of the substantially identical stock or securities that caused the disallowance Does not apply to gains realized on disposition of securities © 2019 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Personal use assets Loss on the disposition of personal use assets is disallowed Personal use asset loss cannot be converted into a business (or production of income) use deductible loss Original loss basis for an asset converted is the lower of personal use basis or FMV at date of conversion Cost recovery basis similarly limited © 2019 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

The Big Picture - Example 30 Wash Sale
Return to the facts of The Big Picture on p. 14-1 Alice owned 100 shares of Green Corporation stock (adjusted basis of $20,000) She sold 50 shares for $8,000 Ten days later, she purchased 50 shares of the same stock for $7,000 Alice’s realized loss of $2,000 ($8,000 amount realized – $10,000 adjusted basis) is not recognized because it resulted from a wash sale Alice’s basis in the newly acquired stock is $9,000 ($7,000 purchase price + $2,000 unrecognized loss from the wash sale) 39 © 2019 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Refocus On The Big Picture (slide 1 of 4)
Alice inherited the house from her mother, Paula The fair market value of the house at the date of her mother’s death was $475,000 An appraisal indicates that the house currently is worth $485,000 Paula lived in the house for 38 years Her adjusted basis for the house was $275,000 As a child, Alice lived in the house for 10 years, but she has not lived there in 25 years The house has been vacant during the 7 months Alice has owned it 40 © 2019 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Alice has been trying to decide whether she should sell the house for its fair market value or sell it to her nephew for $275,000 Alice has suggested a $275,000 price for the sale to Dan She believes she will have no gain or loss at this price. You advise Alice that her adjusted basis for the house is the $475,000 fair market value on the date of her mother’s death 41 © 2019 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

If Alice sells the house for $485,000, she would have a recognized gain of $10,000 Amount realized $ 485,000 Less: Adjusted basis (475,000) Recognized Gain $ 10,000 The gain would be a long-term capital gain 42 © 2019 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

If, instead, Alice sells the house to her nephew for $275,000, she will have a part sale and part gift The realized gain on the sale of $5,670 is recognized as long-term capital gain Amount realized $ 275,000 Less: Adjusted basis (269,330)* Realized gain $ ,670 Recognized gain $ ,670 *[($275,000/$485,000) X $475,000] = $269,330 Alice is then deemed to have made a gift to Dan of $210,000 ($485,000 - $275,000) With this information, Alice can make an informed selection between the two options 43 © 2019 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Dr. Donald R. Trippeer, CPA
If you have any comments or suggestions concerning this PowerPoint Presentation for South-Western Federal Taxation, please contact: Dr. Donald R. Trippeer, CPA SUNY Oneonta © 2019 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

© 2019 Cengage Learning. All Rights Reserved

Similar presentations

Presentation on theme: "© 2019 Cengage Learning. All Rights Reserved"— Presentation transcript:

Similar presentations

About project

Feedback

Log in

Auth with social network:

© 2019 Cengage Learning. All Rights Reserved

Similar presentations

Presentation on theme: "© 2019 Cengage Learning. All Rights Reserved"— Presentation transcript:

Similar presentations

About project

Feedback